Alan Tooze - Chartbook #34 How we paid for the War on Terror

 Or, why Keynesianism and functional finance demand politics.

Until the neoliberals became so dominant in politics, the conservatives, being pro the establishment, authoritarian, and with a tendency towards xenophobia, would usually support all of the ruling class’s wars, but now as many the establishment are very wealthy liberals, the conservatives, who call them the elites, the globalists, and communists, are now less supportive of their wars. 

The conservatives also accuse the 'elites' of funding their wars with printed money, but sadly, many the anti-war liberals have joined them to become fiscally conservative too, as they think this will help limit the funds for the eite's wars, but by doing so, they are seriously limiting our chance of making our society better. 

Reading Stiglitz and Bilmes [Three Trillion Dollar War:  The True Cost of the Iraq Conflict], who lay out the case most explicitly, one is hurled back into a conservative discourse of budgetary common sense. As far as the economics is concerned, their message is that the War on Terror was a crime against frugality and good housekeeping. The critique of wars “financed on credit cards” is straight out of the lexicon of the householder analogy - the common fallacy that confuses state budgets with those of a cash-constrained household that is struggling to get by on credit. When it comes to macroeconomic analysis, Stiglitz and Bilmes start, without hesitation, from the assumption of crowding out. Spending on the war displaces other public spending or private investment. This is the foundation of the conservative critique of “big government” for the last century or more.

Of course, no one would deny that in an economy operating at 100 percent full capacity - as in the kind of European war economy that Keynes analyzed in the 1940s - crowding out may occur. But that is a highly unusual state of affairs and is precisely not what a progressive analysis of capitalism should take for granted. There is no reason to believe that the US economy at any point in the last 20 years has operated close to that absolute limit, at which trade offs are zero sum. Labour force participation has trended down. Recent estimates by a Roosevelt Institute team of J.W. Mason, Mike Konczal and Lauren Melodia suggest that tens of millions of Americans could potentially join the labour force. Meanwhile, in capital markets, even in the face of an unprecedented volume of borrowing, interest rates have trended down, not up. The combination of monetary and fiscal policy has been a desperate effort to crowd private investment “in”, not “out”.

But, if in Stiglitz and Bilmes’s Three Trillion Dollar War you replaced mentions of Afghanistan and Iraq with references to a progressive program for infrastructure, climate or health spending, their manifesto could have been issued by a hit team of Republican fiscal hawk, back when the Republicans had fiscal hawks.

The gist would be something like this: “Gratuitous spending on public investment, raises debt, burdens future generations, pushes up interest rates and squeezes out other more productive investment, resulting in net GDP losses”. In other words, it would be precisely the kind of argument deployed against Biden’s infrastructure plan earlier this year.

What is happening here? Why do progressive critiques of the war fall back on conservative versions of economics to underpin an anti-war position?

Alan Tooze - Chartbook #34 How we paid for the War on Terror